How To Trade Gold: The Basics

Gold trading on the Forex market, which is also called Spot Gold trading is very similar to trading foreign currency pairs.  It is similar to the USD or the EUR because it is globally valuable, the same all over the world and you do not have to hold it in your hand in order to trade it.  Gold is also considered a commodity because it is mined and has physical uses. The truth is though that only a small percentage of gold is used industry, most is either held for investment or turned into jewelry which is why it is traded like Forex. Gold is traded against the USD and the pair is listed as XAU/USD on Forex charts.

The price of gold tends to move opposite to that of interest rates.  When interest rates are high, gold prices usually go down and when interest rates are low, gold often rises.  This actually also usually correlates to the value of the US dollar.  Because gold is valued in USD, when the dollar is worth more it buys less gold and when the dollar is worth less it buys more gold.  Of course no rule is absolute and since this is a very simplified way of looking at the prices it does not always hold true.  During periods of financial difficulty, gold and the USD do not always move in the opposite direction.

Many Forex trading strategies can be adapted to Gold trading.  Gold tends to form trends in a similar manner to Forex.   Trading strategies based on trend lines, RSI and Stochastics, and Fibonacci analysis seem to work well for Gold traders.

Short-term Gold traders will aim to profit using a moving average crossover strategy. For example, when a 10 hour moving average crosses over a 60 hour moving average on the 1 hour chart it can be profitable for short term traders.  Long-term Gold traders will look for the factors that are affecting the price of gold over a longer period, and will make their decisions based on things like interest rates.

Make sure the strategies you consider for Gold trading work when you back test them.  It is important to see if the indicators you think you should use have worked for Gold trading in the past.  Test your strategy on demo trading and in back testing just as you would any other Forex strategy.

Gold can also be more seasonal than Forex pairs.  Analyze the Gold market before you initiate a trading strategy.  Watch carefully and research past action and see what world conditions make the prices move and in which direction.  When something big has happened to the price of Gold, examine what happened that might have caused that change so that when you are trading you can watch for those conditions to potentially repeat themselves.  When you see a particular price formation, make sure the history proves that it behaves like that price formation would be expected to behave.